Conventionally, mortgage loans are provided at a fixed rate of interest such that payments are made monthly to cover the interest and a portion of the principal calculate to result in repayment within a particular term (e.g., 15 or 30 years). Residential customers are often familiar with such payments. Moreover, the payment schedule can be readily conveyed as a single number that remains constant throughout the term of the loan.
Adjustable rate mortgages (ARM) have garnered a significant amount of the mortgage market by allowing customers to access initial low interest rates, and thus low payments. The mortgage underwriters are able to offer these lower introductory rates due to risk regarding interest rates in the out years has been transferred to the borrower. This risk is often acceptable to the borrower when interest rates are not projected to increase or when the borrower expects to turn over the property in a relatively short period.
A number of loan customers, however, have situations that are not conducive either to a conventional fixed-rate mortgage or for an ARM loan. For instance, the borrower may be risk adverse regarding possible interest rate increases. As another example, the borrower may have cash flow fluctuations from time to time and is desirous of greater flexibility for payment amounts.